Forecast on FX Majors for May 11th 2004

General Market Conditions

After Friday's market dramatics it was difficult to judge how things would develop yesterday but by and large the Dollar performed close to expectations. The outstanding currency pair has undoubtedly been Dollar-Yen which made impressive new gains yesterday to reach 114.13. We do not feel this is the end just yet and will look for a move as high as 114.40 minimum with the overall potential still being for a climb to 114.90-00 at which point we have to be slightly more cautious. The rally against the Japanese Yen appeared to allow the British Pound to break down and has reached 1.7703 thus far and we should see further losses today to the 1.7650-60 area. Meanwhile against the Europeans the Dollar made mixed progress, performing slightly better against the Euro compared to the Swissie and we expect this divergent performce to continue today with a new low anticipated in the Euro at 1.1660-80 but probably only a mrginal new high against the Swissie at 1.3095-1.3110. However, once we reach t hese new Dollar highs we do feel that a larger correction can develop and maybe quite strong - thus caution advised we approach targets.

Bias: Cautious gains to 114.40 at least and possibly all the way to 114.90-00

Bullish: Price sailed above the lower target at 113.10 and rallied to reach 114.13. While there is a slight chance of a less impressive day today on balance we remain with a bullish stance and while support at 113.30-40 holds we feel the primary direction remains higher. We require a break back above 113.70 and 113.95 to generate the next rally that shoould reach 114.40 at least and quite possibly all the way to the key weekly target at 114.90-00. If seen this should provide a cap.

Bearish: The strength over the past three days has been impressive but there are signs that the upward momentum is slowing very slightly. However, before any bearish stance becomes valid a break below 113.30 is erquired and only if seen would we feel that a move back to 112.60-90 is possible before further strength.

Price gains were once again quite impressive above the 4-hour Pivot Cloud reaching to 114.13. Both Schaff TC and FXS-RSI are both hard up against the maximum 100 with no immediate signs of reversal. We retain the weekly target at 114.90-00 which could happen directly but from there we would look for a (probable) sharp correction.

Bullish: It certainly seems that the two Fibonacci targets at 114.90-00 will be seen soon. The only possible alternative we see is a slower rally with an initial pullback to 112.60-90 but while this support area holds the target remains intact. Although not expected, and move above 115.00 would move to test the Pivot resistance around 115.30-75.

Bearish: As we move higher towards the 114.90-00 target we need to be a little cautious. It is our impression that once seen the reversal could be quite sharp back to the 112.10-60 area. Thus be aware of the possible speed of the drop. If a cautious approach is required, then wait for a break bacl below 114.00. An earlier bearish view can only be considered should 112.10-60 be broken any sooner.

Elliott Wave Comment:

The move through to 112.47 provided what may be a clue to the larger structure higher and we are following our prime wave count from 103.42 that is rising in a diagonal triangle structure. This has a Wave [iii] target implied at 114.90 with the Wave [c] of this having one Fibonacci projection at 115.00. Should the fifth wave of Wave [c] itself develop in a diagonal triangle this could slow the upward progress.

The combination of bullish monthly, weekly and daily cycles along with a wave structure that implies both a Wave [iii] target at 115.00 and a Fibonacci target for Wave [c] of Wave [iii] at the same level encourages us to look for a move to the area over the next month. This may be slow if the Wave5 of Wave [c] develops as a diagonal triangle and thus we will judge as price develops. However, after a correction into July/August we look for Wave [v] to move up to the 120 area by quarter 4.

Bullish: Further losses were seen to 1.1810 from where we have seen a slow recovery.However, we see resistance around 1.1890-1.1915 and feel there is a good chance of this holding. Thus a more bullish scenario can only be entertained should the 1.1915-20 area break and then we would expect gains to follow-through higher towards 1.1950 and possibly as high as 1.1995 before further weakness can take hold.

Bearish: Losses were seen, but these were quite erratic and choppy. Although these losses did not seem constructive we still prefer to hold a bearish stance today but require 1.1890-1.1915 to hold the current test higher. From there a move back below 1.1850 and 1.1810 should spur losses down to 1.1750-60 and later towards 1.1660-00 where a larger base should develop.

While price made further losses below the 4-hour Pivot Cloud these were not accompanied by strong momentum. However, Schaff TC1 remained at zero while FXS-RSI remained at extremely low levels. With bearish daily cycles we feel this could be the start of a larger decline. However we need to overcome the 1.1760-80 area first and then we feel a larger correction could occur from the next target at 1.1660-00.

Bullish: Having reviewed the wave structure we now tend to favor a move as low as 1.1660-00 before any strong recovery can be made. We should also watch the 1.1740-60 area which does lend some support. However, a bullish stance does require a move above 1.1915 and even then we do not foresee seeing the Euro rally much above 1.1995 if at all. Further resistance rests at 1.2040.

Bearish: The bearish stance is still favored and while 1.1915 holds this should occur directly. Watch support at 1.1760-80 althugh we tend to feel a mvoe as low as 1.1660-00 is more likely. However, care is advised at this lower level which we feel could provoke a correction back to 1.1900-20 once again.

Elliott Wave Comment:

We tend to see the move down from 1.2387 to 1.1758 as Wave [i] of Wave C. This has quite bearish implications and we need to assess the structure of the decline to confirm this strength of bearishness. Wave [i] therefore ended at 1.2180 (just short of a 38.2% retracement) and this should lead to losses over time. We see potential targets at 1.1505 minimum but more likely a move as low as 1.1310 and eventually 1.1160 is likely over a longer period of time.

The cyclic structure looks bearish and should continue for around 2 weeks. Although the blue cycle is rising the larger red cycle is now declining along with the two shorter cycles. Thus the momentum lower should increase over time.

General Outlook:

Having seen the 1.22-1.24 area consistently produce downward reactions we continue with the general bearish outlook but consider that the downside should become stronger over the coming weeks. While the 1.2200 area continues to hold look for the losses to move down to 1.1160 at least.

Bullish: Although price did manage to reach a new high yesterday at the low end of our 1.3075-00 range, the momentum was not impressive. However, while Fibonacci support at 1.2950 holds we feel that further gains are likely. Thus from this support a move back above 1.3010 and then 1.3035 would allow gains to extend towards 1.3050-70 once again but only above yesterdays high at 1.3072 would allow a marginal new high around 1.3095-1.3110 before a further pullback.

Bearish: With the obvious under performance of the Dollar here we have to be aware of a possible bearish scenario. This would begin to take more shape only if support around 1.2930-50 breaks - and if this occurs then we would expect to see follow-through down to 1.2915 and posisbly as low as 1.2885.

Further gains were made above the 4-hour Pivot Cloud but without much momentum and has caused a pullback to the Cloud. However, Schaff Trend Cycle remained at 100 while FXS-RSI has begun to dip from overbought territory. We retain our bullish stance but recognise the slowness of this move and feel that a correction is likely before further gains can be made.

Bullish: While 1.2925-65 holds we see a move to resistance at 1.3075-1.3100 initially which may provoke a further pullback but while the 1.1885-1.2925 support continues to hold the structure wil limply much stronger gains to 1.3475 at least with next resistance at 1.3610 quite possible.

Bearish: Given the strength seen on Friday we do not favor a bearish stance except when seeing temporary pullbacks. There is support at 1.2925 and only if this breaks would we expect follow-through to 1.2885 and possibly 1.2845. However, only below the latter would begin to put doubt on the bullish view. Next support is at 1.2790 and 1.2700.

Elliott Wave Comment:

The reversal from 1.2701 was quite critical and suggests an expanded flat correction from the original 1.3078 high. This has formed wave (ii) of Wave [a] of Wave [iii] and as such has quite bullish implications. Given this strongly bullish view we need to ensure that price action continues to support this structure. This being the case we expect shallow corrections and a move to 1.3475 and possibly 1.3610 as legitimate targets for Wave (iii).

The Swiss Franc has a complex group of cycles and half cycles that make reading quite complex. However, we see two groups both rising at the moment with both two shorter and two longer cycles rising. Thus we are looking for a strong movement higher which should last between 2-3 weeks at least.

General Outlook:

With the recovery from 1.2700 which we see as important to a stronger view, we feel the coming month should be mostly one-way traffic with initial targets at 1.3475 and 1.3610 although we feel the move could be stronger and look to move above 1.4000. The next natural target will then be at the 1.4276 corrective high.

Bullish: Breach of the 1.7810 pivot support does not support a directly bullish view. However, we do feel that from a low around 1.7650-60 that a stronger recovery can be made. From this level a break back above 1.7710-20 would encourage price back to the 1.7790-1.7820 pivot resistance which could stall progress. Above 1.7820 is further resistance at 1.7850-75.

Bearish: The move below 1.7810 was constructive for the short term bearishness and we feel that while any reaction higher holds below 1.7790-1.7820 that further downside progress can be made. A break below 1.7740 and then 1.7710 would confirm these losses and should extend to 1.7650-60 before the move lower stalls. Thus only below 1.7650 would cause a sharper decline much earlier. Further support is at 1.7580 and then 1.7560.

Price broke below both the pivot support at 1.7810-20 and also below the 4-hour Pivot Cloud which should provoke some further losses. Schaff Trend Cycle has remained at zero while FXS-RSI seems to have developed a minor bullish divergence. With mixed cycles we are still cautious about a directly bearish stance here and feel that although a test of the 1.7650-60 area is possible, a strong recovery can ensue from here.

Bullish: Overall we tend to be more bearish but until key support at 1.7660-1.7700 is broken we cannot rule out a surprise move higher. Thus should we see a move back above 1.7975 there would appear to be a chance of seeing follow-through to the 1.8056 area again but only break here would imply a move up to 1.8145-85. Next major resistance is at 1.8295

Bearish: On the whole we prefer a bearish view but would prefer to see key supports at 1.7660 and 1.7700 broken first. This area should be tested at a minimum but only below 1.7650 would allow price to extend losses down to 1.7579 once again and break is required there to accelerate the decline down to 1.7425 and 1.7275

Elliott Wave Comment:

We are a little cautious about the count displayed but overall the structure looks bearish. However, which the cyclic conditions mixed we could see some choppy trading. If this turns out to be correct we may have to consider a new high around 1.8145-80 or 1.8295 as the corrective Wave [b]. A drop below the triangle low around 1.7660-1.7701 would signal a direct loss in Wave 1 of Wave [c].

The daily cycles are mixed with the larger blue cycle now declining but with the shorter cycles suggesting potential for a rise. At the very least we suspect this will translate into some rather whippy and erratic moves. We therefore need to measure these along with breaks of key support/resistance in the price chart. This choppy behavior, if seen could last for up to 2-3 weeks.

General Outlook:

Overall we feel the larger risk for the coming month or two is lower. However we would prefer to wait for breaks of support to confirm this bearish view. Ahead of this we still need to acknowledge the risk of a move up to 1.8145-80 and possibly 1.8295 before the larger bearish influence can take hold. Once the move takes hold we would look for a move down to the 1.70 area at least.

(c) FX-Strategy Inc 2004

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